Average conditional correlation and tree structures for multivariate GARCH models
✍ Scribed by Francesco Audrino; Giovanni Barone-Adesi
- Publisher
- John Wiley and Sons
- Year
- 2006
- Tongue
- English
- Weight
- 419 KB
- Volume
- 25
- Category
- Article
- ISSN
- 0277-6693
- DOI
- 10.1002/for.1014
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✦ Synopsis
We propose a simple class of multivariate GARCH models, allowing for timevarying conditional correlations. Estimates for time-varying conditional correlations are constructed by means of a convex combination of averaged correlations (across all series) and dynamic realized (historical) correlations. Our model is very parsimonious. Estimation is computationally feasible in very large dimensions without resorting to any variance reduction technique. We back-test the models on a six-dimensional exchange-rate time series using different goodness-of-fit criteria and statistical tests. We collect empirical evidence of their strong predictive power, also in comparison to alternative benchmark procedures.